ECB Article Examines Impact of Sovereign Risk on Corporate Credit Risk
ECB published a research bulletin article, by Johannes Breckenfelder, on whether sovereign risk can affect companies outside the financial sector. The article discusses the channels through which the spillover can occur.
The article concludes that when a country sees its sovereign credit risk rise, companies in that country also see their credit risk increase. Companies with a large public-sector ownership, in addition to the companies that borrow heavily from banks, are most affected. This suggests that the transmission of credit risk from sovereigns to non-financial companies occurs primarily through a fiscal and financial channel.
The results of the investigation also highlight the importance of reducing the likely spillovers of sovereign risk to corporate credit risk, for example, via the Capital Markets Union. With the ambition to further develop market-based sources of finance in Europe, the Capital Markets Union may help contain both the fiscal and the financial channels of risk transmission. This is because it would stimulate non-financial corporations to use more diversified sources of finance, for instance substituting part of the their bank lending by issuing larger amounts in more liquid corporate bond markets. The article concludes that, if companies rely less on bank lending and government support, they should be better protected from serious banking crises and sovereign distress.
Related Link: Research Bulletin Article
Keywords: Europe, EU, Banking, Insurance, Securities, Sovereign Risk, Credit Risk, Capital Markets Union, Market Based Finance, Research, ECB
Previous Article
MAS Consults on Measures to Strengthen Cyber Resilience of FIsRelated Articles
HKMA Sets Out Regulatory Treatment for Personal Loan Guarantee Scheme
HKMA has published a circular that sets out the regulatory and reporting treatment for loans that participating authorized institutions may grant to eligible borrowers under the 100% Personal Loan Guarantee Scheme.
ECB Completes Targeted Review of Internal Models of Banks
ECB published the results of the assessment of internal models that banks use to calculate risk-weighted assets for credit, market, and counterparty credit risks.
PRA on Regulatory Treatment of Loans Under Mortgage Guarantee Scheme
PRA published a statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme, or MGS.
FCA Consults on Rules and Reporting Forms for Investment Firms Regime
FCA is consulting, via CP21/7, on the second phase of proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR).
HMT and BoE Decide to Explore Central Bank Digital Currency in UK
HM Treasury and BoE announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential central bank digital currency in UK.
EIOPA Sets Out Expectations on Use of Climate Risk Scenarios in ORSA
EIOPA published an opinion to set out its expectations on the supervision of the integration of climate change risk scenarios by insurers in their Own Risk and Solvency Assessment (ORSA).
Bundesbank Updates AnaCredit Reporting Requirements
Bundesbank published two circulars on AnaCredit reporting requirements. Circular 27/2021 covers changes to the reporting of branches, additional attributes to be reported for investment funds from August 01, 2021, and updates to the list of international organizations.
EC Sets Out Standards for MREL Reporting by Competent Authorities
EC published the Implementing Regulation 2021/622 that lays down implementing technical standards for reporting of the minimum requirement for own funds and eligible liabilities (MREL).
BCBS to Advance Work on Suptech, Climate Risk, and Basel Monitoring
BCBS has set out the strategic work priorities, as part of its the work program for 2021-22.
PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.